New figures from HMRC have revealed that Brits paid a record amount of Capital Gains Tax (CGT) in the 2019/20 tax year.
The total amount of gains recorded was £65.8 billion, an increase of 3% from the previous year. HMRC revealed that the total CGT liability was £9.9 billion for 265,000 CGT taxpayers.
If you make profits on non-ISA investments, buy-to-let property, or on other assets, then you could face a significant tax bill when you come to crystallise those gains. However, there are ways that you can mitigate your tax liability.
Read on for more about why the CGT bill is rising, and for five ways you can cut your Capital Gains Tax bill.
Almost £10 billion in CGT paid in 2019/20
CGT is paid on the profits you make when you sell (or “dispose of”) certain assets. These include:
- Property that isn’t your main residence
- Shares not held in an ISA (or PEP)
- Most personal possessions worth £6,000 or more
- Business assets.
Remember that you pay the tax on the gain, not on the sale price of the asset. So, in simple terms, if you buy £20,000 of shares and sell them for £50,000, you’d typically be liable for tax on the £30,000 gain.
Each individual has an annual CGT exemption. In 2021/22, this stands at £12,300 and essentially means you don’t pay any CGT on the first £12,300 of any gains you make.
According to HMRC, most CGT comes from the small number of taxpayers who make the largest gains. In the 2019/2020 tax year, 41% of the total CGT paid came from those who made gains of £5 million or more.
Furthermore, 43% of CGT gains for individuals came from the 13% of CGT liable individuals with taxable incomes above £150,000, the additional rate threshold for Income Tax.
If you’re liable for CGT, you’ll pay the tax at a rate of 10% if you’re a basic-rate taxpayer (18% for residential property) or 20% if you’re a higher- or additional-rate taxpayer (28% for residential property).
5 ways to cut your CGT bill
- Use ISAs
One of the main advantages of saving into an ISA is that you don’t pay any Income Tax on the interest you receive (from a Cash ISA) or any Income or Capital Gains Tax on the profits you make (from a Stocks and Shares ISA).
In 2021/22, every adult can contribute up to £20,000 to an ISA, so it pays to maximise your tax-efficient savings if you can. Over time, the amount you can hold in ISAs can become substantial (based on your contributions and the investment growth), and so the ability to cash in these investments without worrying about CGT can mitigate substantial sums in tax.
- Crystallise assets each year up to the CGT annual exempt amount
Each year, an individual can realise certain gains without being liable for CGT. In 2021/22 this amount is £12,300.
You can’t carry forward this exemption so if you don’t use it, you lose it.
It can therefore be beneficial to realise some gains each tax year, up to the exemption amount.
- Equalise assets between spouses
As the annual CGT exemption is available to individuals, it can pay to equalise assets between spouses and partners so you can both take advantage of the tax break. Dividing your assets between you and maximising your individual ISA contributions can help you to mitigate the tax.
Bear in mind that, if you choose to transfer any of your assets to your partner, if you later sell the asset, tax is payable based on the gain made during the period it was owned by you as a couple, rather than since the asset was passed to your partner.
- Bed and ISA
If you hold shares outside an ISA, it can pay to bring them within the ISA wrapper. As you read above, this means that any profits you make will not be subject to CGT.
By using the “Bed and ISA” technique, you essentially sell your existing shares (and, for example, make a gain within your annual CGT exemption) and then buy the shares back immediately within an ISA.
The sale and purchase often happen close together to minimise any negative market movements. Once the shares are held within your ISA, you can take advantage of the tax-efficient benefits.
- Consider the Enterprise Investment Scheme (EIS)
The EIS is a UK government scheme that helps start-up and higher-risk businesses raise finance by offering generous tax relief to investors.
As well as Income Tax relief of up to 30%, investing in the EIS also offers CGT benefits. When you invest in the EIS, you normally pay no CGT when realising EIS shares, if you have claimed Income Tax relief on them and the companies still qualify.
In addition, if you have realised a taxable gain (for example, by selling investments) and you then invest that gain in an EIS-qualifying investment, you can defer the capital gain for as long as the money stays invested and the EIS conditions are not breached.
Bear in mind that the EIS is a higher-risk investment and won’t be suitable for everyone. Speak to us for advice if you’re considering this type of investment.
Get in touch
If you want to avoid a significant Capital Gains Tax bill, we can help you to structure assets in a tax-efficient way. Please get in touch to find out how – email firstname.lastname@example.org or call 01454 416 653.